XMFSmashy (99.90)

Now Here's a Headline

13

"Liberty Energy Provides a Corporate Update for the Quarter to September 31, 2010"

Let's hope Liberty Energy has a better grasp of the oil exploration business that it has of the Roman calendar! I started poking around this one when I got a paid promo email titled "Urgent: LBYE Shares May Quadruple on Mega-Oil Find"

This is my favorite part:

"Both Cuba and the Bahamas are taking advantage of the the oil rich fields found off their coasts, and as we speak, are setting into motion the steps to start the deep water drilling to extract millions of barrels worth of Black Gold. But while these countries are drilling off-shore, Liberty already has working wells producing oil now - giving them the edge to profit now - instead of months down the road."

What this promo does not mention is that the company bought its Texas properties, which comprise a 100% interest in one producing gas well (not oil, as the promo claims), a 2% interest in a property with some shut-in wells, and 850 acres of "exploration property" for $125,000. Liberty also bought 1/64th of 1% of a 100% overriding royalty on a property in Bulgaria for $100,000. That's the whole company.

I have requested that LBYE.OB be added to CAPS. I don't expect it to be ratable for very long, so keep an eye out.

I'm only slightly familiar w/ AXAS, but I tend to pass over E&Ps with this much debt. These companies already possess huge operating leverage to commodity prices. Piling financial leverage on top of that is just asking for trouble. This likely creates a binary situation for the equity holder - multibagger or Chapter 11.

I'd rather create such an asymmetric situation by buying call options on an E&P with a clean balance sheet, but that's just me. I'm afraid of debt in the case of businesses that don't have highly reliable, recurring cash flows, and I like oil and gas CEOs who share that aversion. I find they've often been involved with companies that went down in flames, and "got religion" on debt after that.

Sorry I can't give you a very specific opinion on AXAS. After a quick glance, I'll note their assets are all over the place (looks like they grab acreage in whatever the "play du jour" happens to be -- Haynesville, Bakken, Eagle Ford, etc. -- but that may be unfair), and am glad to see there's a divestiture plan in place. That should do the company a lot of good.